“We don’t have Russian bonds but China hit us hard”

What is your investment strategy?

We want to generate a consistent level of income regardless of how economies perform. It is primarily an income fund and we are flexible about the types of bonds we buy.

We independently manage the three risks associated with bonds: interest rate risk, which refers to potential losses due to rising interest rates; credit risk (the possibility of the borrower defaulting); and market risk (volatility). At the same time, we seek to take advantage of markets that price bonds at a discount to their value.

How can investors hedge against inflation?

Higher inflation means higher interest rates. Meanwhile, the terrible conflict in Ukraine created a shock to commodity prices, adding to already high inflation. This is something investors are right to be wary of, because inflation erodes wealth.

Fortunately, there are a few things you can do. One is to avoid government bonds, especially those with long maturities. These are more sensitive to rate increases. It poses a conundrum when events trigger a “flight to safety,” which drives up the value of government bonds. But we still prefer to avoid those that are far from being ripe.

Investors are very cautious right now and this is creating volatility in bond prices. One way to mitigate this is to invest in corporate bonds that will mature within the next three years. These are less sensitive to fluctuations in interest rates.

Here we focus on “high yield bonds”, where we are willing to take on a bit more credit risk because the default rate, which measures the number of companies in default, is very low. These bonds also offer an attractive return for risk.

We also have an “interest rate swap”, which reduces the portfolio’s sensitivity to rising rates. It is a contract where another party agrees to exchange a variable interest rate for a fixed rate. When interest rates rise, we make profits.

About Vicki Davis

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